This piece appears in the NDFC Newsletter of Aug. 15 and is used here with permission. For more information, see the video interview by Joel Hastings with dairy reporter Sherry Bunting at https://www.dairybusiness.com/this-week-in-dairy-with-dairy-journalist-sherry-bunting/
As has been reported, a major National Dairy Summit was held in Albany, N.Y. this past Monday, Aug. 13 to discuss the status of farm milk prices and to focus on ideas and proposals to curb excess domestic milk production. The meeting was very well attended as almost 400 participants from across the country packed the meeting room at the Empire State Plaza Convention Center.
Bob Wellington, Senior Vice President for Economics, Communications & Legislative Affairs for Agri-Mark Dairy Cooperative, moderated the meeting. He opened the meeting by discussing why the dairy industry finds itself in the very difficult dilemma of facing four years of extremely low farm milk prices with no end in sight. He was followed by a discussion from Catherine de Ronde, Agri-Mark’s economist, on milk supply programs of the past. Ben Laine, Senior Economist from Co-Bank, discussed ongoing other commodity supply programs and Marlis Carson of the National Council of Farmer Cooperatives (NCFC) and Attorney Todd Eskelson also discussed supply control lessons from other commodities. A Canadian representative, Nick Thurler, discussed their country’s Dairy Quota System. I spoke briefly about the legislative perspective of enabling legislation to help manage excess milk production in the future. There was also additional legal discussion on the implications related to the Capper-Volstead Act as well as other federal laws.
Most of the afternoon was devoted to a series of proposals that were presented by a number of organizations from all over the country. They can be reviewed on Agri-Mark’s website at the following link: https://www.dairyproposals2018.com/
Bob Wellington finalized the meeting with a discussion and question and answer session.
Overall it was a highly constructive session. Everyone agreed that something needs to be done and soon! Many good ideas were put forth. The meeting was a very good start! Here are summaries of a few of the proposals presented.
Direct Base Plan with Flexible Provisions as presented by Bob Wellington as a possible method for a national base-excess plan to be structured. This plan would take Federal legislation and needs to be effective throughout the country.
- This plan is a direct base plan where penalties are levied against farm milk production in excess of historic base milk volumes, including temporary base reduction.
- These penalties only occur when market prices are below $20 per cwt and increase in both penalty value and adjusted penalty volume as farm milk prices fall. The goal of this program is to give dairy farmers an economic incentive to reduce milk production during times of low prices so market prices rise.
- Individual Farm Base:
Calculate the production per day per farm on a monthly basis for a three-year period. Each farmer’s daily base would be the highest of those monthly averages. Future monthly bases would be the daily base times the number of days in the month. This plan was used by a cooperative already.
All-Milk Price Penalty/cwt. Temporary Base Reduction
On over-base milk only
$18.00 to $20.00 $2.00 1%
$17.00 to $17.99 $3.00 2%
$16.00 to $16.99 $4.00 3%
$15.00 to $15.99 $5.00 4%
Below $15.00 $6.00 5%
- Changing or Setting New Bases:
- New farms get a 1,000,000 lb. base and 95% of their actual production.
- After 2 years, new farms can calculate their base based on actual production during that period, using the highest monthly average milk produced per day.
- Bases are not transferable between farms.
- When the all-milk price rises above $2.00/cwt for a consecutive 12-month average, farmers can choose to re-calculate their base using current production or continue with their existing base.
- Administration of the Program:
- USDA would appoint a dairy farmer commission to oversee this program similar to the National Dairy Board.
- Some flexibility could be written into the law to allow the commission to change selected aspects of the program depending upon market and farm level
- Use of Penalty Money Collected:
- Commission would determine how the money collected would be used.
- Options could include:
-Lowering the costs of the MPP program
-Pay to farmers who decreased production
– Buying surplus product and donating it
– Apply it to dairy promotion funds
– Apply it to export incentive program.
- When first challenged to develop a comprehensive supply management plan, the Federal Order concept of classified pricing was considered as a possible template. This pricing system takes essentially the same farm milk and prices it at four different levels according to its use or “classification.” Milk used for beverage products are priced at the highest, Class I level, while three uses of milk (Class II for soft products like yogurt, cottage cheese and ice cream; Class III for most cheese and whey products; and Class IV for butter and nonfat dry milk) have lower price levels and values. This pricing system has been in effect for 80 years and has weathered many changes in markets, technology and price relationships.
- Could dairy farmers be paid based on different basic pricing levels? This might be attractive to dairy farmers throughout the nation who could be paid $20.00 per hundredweight for milk immediately. However, they could only receive that price on limited volumes of that milk. For example, in February 2018, the U.S. all-milk price was $15.30 per hundredweight. If there were
- Three stratifications for the value of milk, 60% of the milk could receive a price of $20.00 per hundredweight, 2% could receive a $2.00 price, and the balance would receive a residual price of $8.69. If dairy farmers around the country were to reduce production by 2%, the all-milk price would rise significantly, and the residual price would climb. If the market price reached $20, the residual price would also be $20. At that point, all prices would rise to the higher market price.
- The problem with this pricing scheme is its complexity. It would take significant amounts of time and information to calculate the residual price on a farm by farm basis. While it might be doable in a single, relatively higher value Federal Order like the Northeast Milk Marketing Order, it would be more difficult in other Orders. This is particularly so if producers switch Orders or move in and out of regulation, like some do seasonally or for other reasons. This would also be extremely difficult to do for Federally unregulated producers which still represent a large share of dairy farms and milk production.
National Family Farm Coalition Presentation:
- Setting an immediate floor price of $20/cwt for milk used to manufacture dairy products;
- Establishing a milk product purchasing initiative by utilizing U.S. Department of Agriculture’s authority under 7 USCS Section 612c, commonly referred to as Section 32 surplus removal;
- Placing an immediate moratorium on Environmental Quality Incentives Program (EQIP) funding and direct and guaranteed loans for concentrated animal feeding operations (CAFOs);
- Holding hearings on the milk pricing formula and the dairy crisis; Implementing a supply management program as outlined in the proposed Federal Milk Marketing Improvement Act of 2011 to stabilize milk production. More information on these actions follows.
Set an immediate floor price of $20/cwt for milk used to manufacture dairy products.
To immediately address this crisis, Congress should set a floor price of $20/cwt for milk used to manufacture dairy products, which, together with FMMO order differentials, will raise farmer prices to the cost of production. However, while this floor price will provide some emergency relief for dairy farmers, it should not be viewed in any way as a permanent solution or adequate correction of the FMMO pricing structure.
Establish a milk product purchasing initiative.
To further stabilize the milk price, we request that the Secretary of Agriculture utilize his authority under 7 USCS Section 612c, commonly referred to as Section 32 surplus removal. Section 32 funds may be used to encourage domestic consumption of farm products by increasing their use by low-income groups.
We propose that USDA establish an immediate protocol to purchase surplus milk and whole milk products with Section 32 funds for use by emergency food providers. The measure would help dairy farms without adding to purchasing costs for food banks and other feeding programs. Specifically, this strategy would require the use of one-half the excess cheese products on the market. As with other USDA procurement strategies, this would also include the following contract selection criteria:
- 75 percent of purchases coming from dairy farms with fewer than 300 cows;
- Contract bidders sourcing their milk from women-owned dairies would receive 20 priority points;
- Contract bidders sourcing their milk from rural HUB zones would receive 20 priority points; and
- Employing the $25,000 Small Business small contract threshold to source milk from small dairy businesses.
Holstein Association USA, Inc. Dairy Price Stabilization Program
The program is mandatory in that all states will be included. However, it is flexible in that individual producers may decide to expand their dairy operation and new producers are allowed to enter the dairy industry. States having programs to grow their dairy industry will still be able to implement such programs.
For the purpose of this legislation, the term “new producer” shall be defined as any individual or group of individuals entering the dairy business, none of whom have any interest in milk producing cows at the time of this bill’s enactment.
Upon implementation of the program, each dairy producer will be assigned an initial base of raw milk marketings using an average of the calendar years 2007, 2008, and 2009.
There will be a committee setup to review individual appeals.
- For those producers with less than a 3-year history, calendar year 2009 will be their initial allowable milk marketings base. Each producer’s base will be divided into their quarterly historical milk marketings. Bases are a moving base whereby at the beginning of the next 12-month period, a producer’s base will be the recent past 12 months. The base is assigned to the producer owning the producer license for the dairy operation.
- Bases can be transferred by filing the exchange with the Farm Service Agency.
- Multiple dairy producers can combine their bases from two or more facilities into one dairy facility provided each producer holding one of the bases to be combined remains engaged in milk production of the operation in the combined facility.
- In all other instances a producer’s base evaporates once the owner of the producer license no longer is actively producing and marketing milk.
- The program will be administered by the U.S. Secretary of Agriculture with an advisory Board, hereafter referred to as Board, appointed by the Secretary from nominations. The Board will include two dairy producers from each of 6 regions—the West, South, Southeast, Central, Midwest and Northeast; one consumer representative, one representative of dairy product firms (cheese, butter, milk powder or other manufactured products), one representative of a fluid milk bottler, and a dairy economist advisor to the Board.
- The U.S. Secretary of Agriculture in consultation with the Board will forecast the market for fluid milk and manufactured dairy products (total commercial disappearance) that includes both the domestic market, any foreseen government purchases, and exports for each quarter of the next 12 months. Taking into consideration the current level of milk production, a determination will be made as to the needed change in U.S. milk production to fulfill the market needs for each quarter of the next 12 months allowing for a producer raw milk price that is positive over operating costs as determined by the Board. The Board will meet quarterly with the U.S. Secretary of Agriculture to revise forecasts and to forecast out by quarter for the next 12 month period. The market needs by quarter is referred to as “allowable milk marketings”.
- Dairy producers who maintain their milk marketings by quarter within the “allowable milk marketings” are not directly impacted by the program. Recognizing that milk production is affected by weather, feed quality, herd health, etc., a producer who exceeds the “allowable milk marketings” for a given quarter will not be impacted provided that their milk marketings for the entire 12 month period are within the “allowable milk marketings” and if so, any “market access fees” collected will be refunded.
- Dairy producers who produce at or below their “allowable milk marketings” will not be impacted with a reduction in base in the future marketing period/s.
- Dairy producers who wish to expand their dairy operation and exceed the “allowable milk marektings” will be assessed a “market access fee” per hundredweight on milk marketings that exceed their “allowable milk marketings” level. This “market access fee” will initially be determined by the U.S. Secretary and the Board, but we expect it will be in the range of $6.00 to $9.00 per hundredweight on this “new” milk. Based on historical performance of the program, this market access fee may be increased or decreased, but cannot be increased for dairy producers currently being assessed the “market access fee” for the current 12-month marketing period. If the market access fee would drop while a producer is expanding, the fee could go down (because we need more milk), but a fee would never go up once locked in for 12 months.
- For dairy facilities who expand marketings beyond the “allowable milk marketings” and pay a “market access fee”, their fees would be collected and redistributed back to the dairy producers who held their milk marketings within the “allowable milk marketings”. Redistribution of “market access fees” will be done annually at the anniversary date of the inception of this program.
- Once it is determined that a dairy producer has expanded milk marketings beyond the “allowable milk marketings” for a given quarter, the dairy producer will have the “market access fee” deducted for the proportional amount of “new” milk from their milk check in the following quarter and for the next three quarters. The dairy producer’s higher milk marketings during the first quarter and following three quarters having a “market access fee” becomes the new and higher historical base to which milk marketings for the quarters for the next 12 months will be compared to.
- For new producers without a full year of milk marketings or those entering after the implementation date, their base will begin being established with their first full quarter of milk marketings and for the next three quarters. A new producer who begins producing milk on January 10, 2010 will begin establishing his or her base and paying any fees on “new milk” (which may be all of their milk if they are not the transferee of existing allowable milk marketings) on April 1, 2010 through March 31, 2011.
- Half of the new producers’ market access fees will be deferred to the corresponding quarter during their second year of operation. Then, consistent with how the program is written for existing producers, the new producer is eligible for market access fee dividends if they stay under their allowable milk marketings, even though they will be paying market access fees on year one’s milk marketings.
- New producers lose the ability to defer market access fees after their first full four quarters of operation. This includes a new producer who pays no market access fees during any time during their first four quarters.
- As with Milk Income Loss Contract payments dairy producers will file their milk production history and monthly milk marketings with their area USDA Farm Service Agency (FSA) office to establish a milk base. Dairy producers will authorize their milk plant or dairy cooperative to submit their milk marketings directly to the FSA office. If a dairy producer’s milk marketings exceed the “allowable milk marketings” for a given quarter, the FSA office will notify the dairy producer’s milk plant or dairy cooperative to deduct the “market access fee” starting the following quarter and for the next three quarters and submit the fees to the FSA office. Area FSA offices will submit “market access fees” collected to the national FSA office where they will be pooled and a value per hundredweight will be calculated for distribution to all dairy producers who had not exceeded the “allowable milk marketings”.
- The Federal Milk Market Administrator or State Market Administrator, will, if solicited, provide information to use to verify reported producer milk marketings from dairy plants.
- Administrative costs: An assessment of no more than two cents per hundredweight will be assessed against all milk marketings to cover administrative costs of the program. Milk plants are to submit these assessments directly to the national FSA office.
Dairy Price Stabilization Program, Wisconsin Farmers Union
Here is how the DPSP is structured. It’s actually very simple. Before the beginning of each quarter, USDA will announce two numbers, based on a formula that was developed with the help of economists from Cornell University, who have provided third-party analysis of this program. One number will be the allowable year-over-year growth rate (normally 3%) that any producer can expand their production without paying any market access fee. The other number will be the Market Access Fee (between $0.03-$0.50 per cwt., depending on economic indicators in the industry) that will be paid by expanding dairies for the first year of the expanded production. 100 percent of those fees sent as a dividend to the dairies that stayed within their allowable milk production.
And that’s it. With that information, each producer will decide how much milk they want to produce. A dairy can choose to expand its production beyond the year-over-year allowable growth rate and pay a Market Access Fee for the first year of the expanded production. Or a dairy can choose to maintain their production within the allowable growth rate and receive their share of the Market Access Fees paid by those who expanded.
In essence, this plan is an agreement amongst the “family of producers” to allocate future market growth. If you wish to expand your facility beyond the allowable growth rate and grab a larger share of the market, the program allows you to pay your colleagues to hold their production so that the market can absorb your increase in production. It is as simple as that.
We did not come up with these numbers out of the air. We took the idea to the Cornell University Program on Dairy Markets and Policy and they modeled it. They ran hundreds of different scenarios through their model and they discovered that with the structure outlined above, enough producers will decide to hold their production so that the market can absorb the increases of those who wish to expand. The milk production growth rate is slowed up just enough to keep the growth in supply in balance with the growth in demand. This smooths out the price cycles and gets us off the boom and bust merry-go-round that we are on.